Why Genesee & Wyoming Has Taken a Dive these Last 12 Months
GWR’s diversified operations
Genesee & Wyoming (GWR) has operations spread over three continents, spanning North America, Europe, and Australia. The company is the largest short line operator in the US, adding more scale to its freight carrier business in North America.
This reduces the effective tax rate for the company compared with its peers. Plus, the US government has extended the short line tax credit for fiscal 2016. Although it will expire on December 31, 2016, past experience shows an extension trend.
Diversity in commodities hauled
Unlike its US peers Norfolk Southern (NSC), CSX Corporation (CSX), and Union Pacific (UNP), Genesee & Wyoming has a much smaller exposure on coal. Coal transportation accounted for just 6% of the total revenues of $2.0 billion in 2015. With respect to carloads, coal formed 12% of total carloads in the same year. Railroads and trucking companies make up 21.6% and 11.8%, respectively, of the iShares Transportation Average ETF (IYT).
Forward PE (price-to-earnings) ratio
Forward PE is a better measure to value railroads. Railroads are highly leveraged at any point in time due to the presence of maintenance capital expenditure. Hence, investors are interested in the leftovers after interest expenses.
Currently, Genesee & Wyoming (GWR) is trading at a forward PE of 16.1x, against the average forward PE of 15.5x for its peer group, excluding GWR. This represents a marginal premium of 3.3%. In the last two years, the highest forward PE for GWR was 22.0x while the lowest was 10.9x.
This can be attributable to the history of successful acquisitions in the past, along with effective debt management. Plus, the company has taken a slew of measures to reduce costs, specifically the UK coal business restructuring along with matching resources with volumes in Australia.
However, a weakening Australian dollar and a slow recovery in the price of commodities can impact the stock.
Browse this series on Market Realist: